EBNER & ANOR v FC of TMembers:
BH Pascoe SM
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
 AATA 525
BH Pascoe (Senior Member)
1. These are applications to review decisions of the respondent disallowing objections to assessments of income tax. These assessments had been issued to include alleged omitted income following an audit of the taxpayers' affairs over the period from the year ended 30 June 1988 to 30 June 1999 inclusive.
2. At the hearing the applicants, Mr M. Ebner and Mrs I. Ebner, were represented by Mr A. Athanasiou, a solicitor. The respondent was represented by Mr. P Solomon of counsel. Evidence was given by both applicants.
3. In relation to Mr Ebner, assessments in dispute and the adjustments from the audit were:-
|Year ended 30 June 1990|
|Taxable income as returned||$ 5,100|
|add funds for purchase of Range Rover||$39,954|
|Taxable income assessed||$45,054|
|Year ended 30 June 1993|
|Taxable income as returned||nil|
|add 50% of funds received from Igedo||$38,161|
|Taxable income assessed||$38,161|
|Year ended 30 June 1994|
|Taxable income as returned||nil|
|add 50% of funds received from Igedo||$14,470|
|Taxable income assessed||$14,470|
|Year ended 30 June 1999|
|Taxable income as returned||$ 8,413|
|Add funds received from overseas||$ 4,990|
|Taxable income assessed||$13,403|
4. In relation to Mrs Ebner the number of years and amounts in dispute were considerably greater and the adjustments as a result of the audit were:-
|Taxable Income Returned||Taxable Income Amended|
|Year ended 30 June 1988||$5,100||$ 86,949|
|Year ended 30 June 1989||$5,100||$109,315|
|Year ended 30 June 1990||$5,100||$672,071|
|Year ended 30 June 1991||nil||$438,379|
|Year ended 30 June 1992||nil||$ 80,204|
|Year ended 30 June 1993||nil||$131,602|
|Year ended 30 June 1994||$ 48||$114,710|
|Year ended 30 June 1995||$1,166||$291,514|
|Year ended 30 June 1996||$2,993||$ 28,663|
|Year ended 30 June 1997||$8,313||$ 28,519|
|Year ended 30 June 1998||$8,680||$ 47,413|
|Year ended 30 June 1999||$8,417||$ 47,197|
The total additional alleged income included in the assessments over the twelve years was $2,031,619 made up of:-
|Estimate of expenditure on valuables stolen|
|-From residence in 1998||$ 569,500|
|Actual expenditure on valuables seized|
|-By AFP from residence in 1998||$ 285,066|
|Funds received from overseas - Igedo Internationale||$ 74,606|
|-Other sources||$ 240,131|
|Funds used for purchase of Frankston property||$ 275,000|
|Deposits to National Aust. Bank A/c||$ 130,298|
|Balances in Pyramid Building Society A/cs||$ 81,459|
|Expenses paid on behalf of Mr M Ebner||$ 175,283|
|Funds used to purchase of Rolls Royce||$ 37,555|
|Term Deposit Bank of Melbourne||$ 60,800|
|Payment legal fees||$ 96,725|
|Interest and Dividends||$ 5,196|
5. It seems likely that the interest of the respondent was initially attracted by a report of a robbery from the residences of Mr and Mrs Ebner in which antiques, jewellery and watches of an estimated total value of $658,195 were stolen on 12 May 1998. This was followed by the execution of a search warrant and seizure in October 1998 by the Australian Federal Police on behalf of ITSA as Trustee in Bankruptcy of Mr Ebner's estate. Further antiques, jewellery and watches were seized which, according to a later newspaper report, were said to be valued at a total of $558,710.
6. It is appropriate to summarise the chronological order of events taken primarily from the evidence of the applicants. Mr and Mrs Ebner were both born in Germany but migrated to Australia as children. They married in 1980. In 1978, Mr Ebner had purchased a 208 acre property in Gisborne which he planned to develop as a tourist resort. In 1985 he incorporated Macedon River Country Club Pty Ltd ("MRCC") to be the future manager of the property. In the same year Logenstone Pty Ltd ("Logenstone") was incorporated which, according to Mr Ebner, was to be the developer of the property. No development actually took place. In 1987, Mrs Ebner resigned from Myer Stores Ltd after 25 years employment. In the same year, Logenstone entered into an agreement with a German company, Igedo Internationale Modemesse Kronau GMBH ("Igedo"), to act as its Australian agent for a retainer of DM5000 per month plus commission. In 1988 Logenstone arranged a loan facility with the ANZ Bank on the security of the Gisborne property. In the same year, either Logenstone or the Ebners sought to establish a business venture in Düsseldorf. Although entering into lease and fit out arrangements, no trading was commenced according to Mr Ebner because the ANZ Bank refused further funding. In November 1989, the ANZ gave notice of withdrawing its loan facility and, in May 1990, gave notice to Mr Ebner of his liability under guarantee for some $1.36 million. Also in 1990 Mrs Ebner resigned as a director of Logenstone, MRCC was deregistered and Mr and Mrs Ebner commenced trading as a partnership under the Logenstone trade name. Prior to this in 1989 Mrs Ebner acquired a property in Frankston for $275,000. In February 1991; the ANZ Bank sold the Gisborne property for $350,000 as mortgagee in possession. It appears that no further action was taken by the Bank to recover the balance in excess of $1 million of its loan to Logenstone. In February 1992, Logenstone was placed in liquidation. In July 1993, Igedo terminated its agreement.
7. In August 1994, Mr Ebner became bankrupt apparently as a result of a credit card debt to the ANZ Bank. He was discharged in
ATC 2267October 1997. During 1997, Mrs Ebner commenced proceedings in the Federal Court defending an application by the Official Trustee in Bankruptcy to set aside the transfer of Mr Ebner's half interest in a house in Mt Eliza to her. She was unsuccessful. In 1998 the robbery and the seizure of valuables occurred. Mrs Ebner again commenced proceedings in the Federal Court claiming that all of the valuables sized belonged to her and not to Mr Ebner. She succeeded in having the Court find that she had a 50% interest in the articles. In July 2001, both Mr and Mrs Ebner were convicted of a fraud against the Commonwealth in falsely obtaining unemployment benefits over four years from 1996. It was said that the money, said to be $72,000, had been repaid.
8. In summary, the Ebners maintained that no part of the alleged understatement of taxable income represented income derived by them. It was said that the income from Igedo was more than offset by expenditure incurred under the agency agreement. The deposits to bank accounts, the purchase of antiques, jewellery and watches, real estate and motor vehicles was said to have been funded from savings from Mrs Ebner's salary prior to 1987, loans from Logenstone or gifts from relatives. It was said that Mrs Ebner had received an inheritance from her grandparents of some $600,000 which had been lent to Logenstone and subsequently repaid to her over subsequent years. The funds for the purchase of the Frankston house was initially said to have come from a cousin in Germany, Ludwig Bock, with Mrs Ebner acting as trustee. In oral evidence at the hearing this was retracted on the basis that Mr Ebner thought that he had provided the funds but now realised that this was a misapprehension. As an alternative, Mr Athanasiou urged the Tribunal to follow the decision of the Federal Court and find that Mrs Ebner had purchased only 50% of the antiques, jewellery and watches.
9. It should be said at the outset that I had the same difficulty with the evidence of both Mr and Mrs Ebner as did Goldberg J and Finkelstein J in the Federal Court proceedings. In
The Official Trustee v Bankruptcy v Ebner VB 2082 of 1994, Goldberg J "found both Mr and Mrs Ebner to be unsatisfactory and unreliable witnesses". He found that both changed their evidence in material respects and various versions were inconsistent and unreliable. In
Ebner v The Official Trustee in Bankruptcy VG 7179 of 1999, Finkelstein J said (at paragraph 9) in relation to the evidence of Mrs Ebner:-
"At the conclusion of her evidence I was of the opinion that very little of what Mrs Ebner said should be accepted as true, unless it was contrary to her interest. Even during the early part of her evidence I had begun to suspect that Mrs Ebner, supported by her husband, was prepared to say anything that would best suit her purpose, that purpose being to keep the items in suit away from her husband's creditors. In the end I think that Mrs Ebner was quite indifferent to the truthfulness of much of what she said."
A further indication of the preparedness of Mr and Mrs Ebner to be less than truthful was seen in their convictions for fraud against the Commonwealth as a result of claims of having no assets and not being married in applications for social security benefits.
10. While accepting the long passage of time between the giving of their evidence at the hearing and the happening of events back to 1988, both Mr and Mrs Ebner had remarkable lapses of memory and an apparent absence of records when asked by the Tribunal how such a precisely detailed list of each item stolen with its value had been prepared, Mr Ebner said that it had not been prepared from detailed records but primarily from memory. Mrs Ebner, on the other hand said that she kept a file on each item in the collection with notes of when purchased, cost, invoices for repairs, relevant newspaper articles, some photographs and descriptions. Nevertheless, such records were not produced and while arguing that the value of the stolen items, not cost, had been wrongly included as income, no attempt was made to show the actual cost, date of purchase or source of any item on the list.
11. In his witness statement Mr Ebner stated that the amount of $275,000 used for the purchase of the Frankston property was money held in trust from her cousin, Ludwig Bock and a declaration to that effect dated 26 November 2002 said to be signed by Mr Bock was attached. Mrs Ebner, in her witness statement, stated that the content of her husband's statement was true. In his oral evidence at the
ATC 2268hearing, Mr Ebner first insisted that he had arranged for Mr Bock to provide the statement. When faced with a report of an interview with Mr Bock in Germany, Mr Ebner completely changed his evidence. He then said that he had "thought" that Mr Bock had paid for the property but now realised that his wife paid for the property out of her own money and had not been reimbursed. Mrs Ebner in her oral evidence said that she had thought that Mr Bock was to reimburse the $275,000 but now knew that this was incorrect. I am satisfied that the alleged declaration of Mr Bock was prepared by Mr Ebner alone after the commencement of the tax audit and was false.
12. There was considerable vagueness relating to the alleged inheritance of Mrs Ebner as to its source and amount. It is noted that two sisters and the mother and father of Mrs Ebner are resident in Australia. While it was said that the father was in hospital no reason was advanced why evidence was not called from the mother or sisters. It is reasonable to assume that their evidence would not have assisted the applicants.
13. Given my views as to the truthfulness and completeness of the evidence of Mr and Mrs Ebner, I am satisfied that they have not discharged the onus of proof required by s 14ZZK of the Taxation Administration Act 1953. However, there are two areas of concern in the assessments in dispute. The first is the inclusion of the gross receipts from Igedo with no allowance for any expenditure incurred in the course of deriving such income. The second is the inclusion as income of the alleged value of the valuables stolen in May 1998 rather than the cost of such valuables. It is accepted that, in discharging the burden of proof, it is not sufficient to demonstrate that the assessments are excessive but to show the amounts which are more properly to be regarded as an appropriate reflection of taxable income. While estimates made on inexact evidence have featured in many decisions of this Tribunal and the Courts, the evidence in this case provided very little on which such estimates could be made. However, in
Martin v F C of T 93 ATC 5200, Davies J said (at p. 5207):
"An unwilling taxpayer, even though he is a tax evader whose evidence is not reliable, should not be assessed to tax on gross income. The Act requires that a judgment be made as to allowable deductions. I have sought to undertake this task, doing the best I can on the inadequate information available, and keeping in mind that the burden of proof lies on the taxpayer, Mr. Martin."
Equally the comments of Latham CJ in
Trautwein v F C of T (1936) 56 CLR 63 are relevant to this matter where it was said (at pages 87 and 88):-
"The circumstances that the facts are (or were) peculiarly within the knowledge of one party is a relevant matter in considering the sufficiency of evidence to discharge a burden of proof. (See cases cited by Isaacs J. in Williamson v Ah On (19226) 39 C.L.R. 95 at pp. 113-115). Obviously the facts in relation to his income are facts peculiarly within the knowledge of the taxpayer.
In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.
The application of sec. 39 is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess and that it is therefore very probably wrong. It is prima facie right-and remains right until the appellant shows that it is wrong. If it were necessary to decide the point I would, as at present advised, be prepared to hold that the taxpayer must, at least as a general rule, go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right."
Here the taxpayers may have lost their books or records but I am very doubtful that there has been a loss of memory. They simply did not tell the truth.
14. Nevertheless, the very nature of the agreement with Igedo would seem to make it
ATC 2269clear that Mr and Mrs Ebner must have incurred some expenditure in carrying out their responsibilities as agents. Their evidence appeared to be saying that the whole of the income was incurred as expense and no profit was derived. I cannot accept this without something more by way of evidence even if not fully exact. However, some allowance for deduction should be made and, in the circumstances, I am prepared to find that an allowance of 25% of the income derived from Igedo is to be allowed as a deduction. Such allowance would reduce the taxable income of Mr Ebner by $9,540 for 1993 and $3618 in 1994. For Mrs Ebner, taxable income would be reduced by $5,494 in 1991, $9,540 in 1993 and $3618 in 1994.
15. The next difficulty is the inclusion as income of Mrs Ebner of the alleged market value of valuables stolen. There are two issues here. One is the inclusion of market value rather than cost of purchase. The other is the argument that Mrs Ebner owned only 50% of the valuables as found by the Federal Court. The second issue can be dealt with briefly. The firm evidence of both applicants before the Tribunal and in sworn evidence in the Federal Court was that the valuables were purchased solely by Mrs Ebner and wholly owned by her. The decision of the Federal Court related solely to ultimate ownership not who incurred the expenditure. The assessments in dispute here are based on expenditure and there is no evidence that the expenditure was incurred other than by Mrs Ebner. Consequently no amount of such expenditure should be attributed to Mr Ebner irrespective of who had the ultimate ownership.
16. The issue of market value as against cost is clearer. The amount which should be included is the cost of these valuables. However, no evidence of such cost and dates of purchase was provided. It would appear from the documents that the respondent has included the actual expenditure on the seized valuables and in the year of expenditure. I must assume that this was based on the records said to have been kept by Mrs Ebner. It would then appear that the stolen valuables have been included in each year of income in the same proportions of the total amount as the seized valuables. If the newspaper report was correct, the expenditure on seized valuables included in the assessments represented 51% of the value. It would seem appropriate to apply the same percentage of the value of stolen valuables in arriving at an estimate of cost. Given the limitations of the information before me, it is appropriate that this matter be remitted to the respondent to make the necessary recalculations with liberty to the parties to apply to the Tribunal if there is dispute as to the result of such calculation.
17. Another issue raised by the respondent was the standing of Mr Ebner to make applications for review as a consequence of his bankruptcy between August 1994 and October 1997. Three of his assessments related to financial years prior to such bankruptcy. As such, Mr Ebner is not a person whose interests are affected by the decisions for which review is sought. Decisions of the Courts have made it clear that Mr Ebner does not have standing to seek such review. The only decision in relation to which he does have standing is that related to the year ended 30 June 1999. However, I am satisfied that he has not discharged the onus of proof that any of the assessments were excessive. Consequently, the question of standing is not significant in the end result.
18. An issue raised by Mr Athanasiou only at the hearing was the inclusion in the assessments of Mr and Mrs Ebner of Social Security Benefits which were repaid subsequently. I have no specific evidence of such repayment, the actual amount or the amounts of benefits included in the assessments in dispute. Again it is appropriate to remit this matter to the respondent with a direction to amend such assessment to exclude income from social security benefits which has been repaid subsequently subject to the respondent being satisfied that such repayment occurred. Again liberty to apply should be granted. It should be noted that this issue was not raised as a ground of objection. Nevertheless, I am prepared to exercise the discretion under s 14ZZK(a) to allow the applicants to include such ground in their application for review.
19. The final issue is that of penalties. No evidence or specific submission was provided for or by the applicant on this issue. The respondent imposed in the assessments penalties equal to 90% of the tax shortfall in each year. For the years ended 30 June 1988 to 30 June 1993 inclusive, these penalties were
ATC 2270imposed under s 222 and s 223 of the Income Tax Assessment Act 1936 ("1936 ITA Act") and reduced under s 227 from the statutory 200%. For the years ended 30 June 1994 to 1999 inclusive, the penalties were imposed under s 226J at 75% increased by a further 20% under s 226X. Given the many reservations I have relating to both the quantum of income assessed, particularly to Mr Ebner, and the possible sources of such income but somewhat offset by the lack of truthfulness from the taxpayer I am led to the view that the penalties involved should be reduced to 75% of the tax shortfall in each year. For the later years, I am satisfied that the appropriate penalty provision is s 226J involving an intentional disregard by the applicants of the provisions of the Act. However, I am not satisfied that s 226X should apply as, although there was a marked lack of cooperation and truthfulness I am not prepared to find that steps were taken to actively hinder the respondent. In any event the power under s 227 should be exercised to limit the penalty to 75%. While s 226J did not apply to the earlier years, as a matter of consistency, I would reduce the penalty in those years to the same 75%.
20. In the previous paragraph I referred to reservations on quantum and likely source of income. It was argued that a major source of funds expended by Mr and Mrs Ebner was Logenstone and funds made available by way of loan from the ANZ Bank. It was said that Logenstone did not derive profits out of which profit distribution could have been made to the shareholders/directors. Given my views as to the evidence of Mr and Mrs Ebner I cannot be satisfied that this was true. While the respondent is not required to demonstrate a source of alleged income with a taxpayer having the onus to prove that income was not derived, there was a clear suggestion that the likely source of income was the trading profits of Logenstone and trading profits of Mr and Mrs Ebner. No evidence of the alleged failed business venture in Düsseldorf was provided. There was no evidence that sales of any part of the large collection of antiques, jewellery and watches were not made. I am unable to be satisfied either that profits equal to the assessed income were derived or not derived. Simply, the applicants have not discharged the required onus of proof that the income was derived.
21. It follows from the foregoing that the objection decisions in relation to Mrs Ebner in respect of the years ended 30 June 1988 to 30 June 1999 inclusive should be varied to the extent of remitting the matters to the respond to amend the relevant assessments in relation to the income from Igedo, the expenditure on stolen valuables, the inclusion of Social Security Benefits and the penalties imposed in accordance with these reasons. The objection decision in relation to Mr Ebner in respect of the year ended 30 June 1999 should be varied to the extent of remitting the matter to the respondent to amend the assessment for that year in relation to the inclusion of social security benefits and the penalty imposed in accordance with these reasons. The objection decisions in relation to Mr Ebner is respect of the year ended 30 June 1990, 1993 and 1994 should be affirmed.